Category: Economics

The disinflation as American triumph

by  Tyler Cowen in

That is the theme of my latest Bloomberg column, score one for the Quantity Theory as well, here is one excerpt:

Enter the notion of “credibility.” A long-standing tradition in macroeconomics, sometimes called rational expectations, suggests that a truly credible central bank can lower inflation rates without a recession. If the central bank announces a lower inflation target, and most people believe the central bank, wages and prices adjust in rough sync with demand. All nominal variables move upward at a slower pace, markets continue to clear, and the economy keeps chugging along. Because individuals in markets believe the disinflation process is for real, they are willing to act in accordance with it in their pricing and wage-demand decisions.

Although rational expectations theory has undergirded several Nobel Prizes (see Robert E. Lucas and Thomas Sargent, for example), most mainstream economists these days do not believe in it as a general approach. The critics might be behavioral economists who scorn the notion that individuals are rational in their market decisions, or they might believe that full credibility is rarely if ever present. After all, do we not live in an age of low trust and mixed quality governance? Over the last year, for instance, I have been party to numerous conversations suggesting the Fed will be afraid to pursue disinflation out of fear of inducing a recession and indirectly electing Donald Trump as president.

And yet it seems the credibility has been there, and so we can give plaudits to various parts of the federal government, including President Biden, for supporting Powell and the Fed. At no point did the president intervene to bash the central bank or send a mixed message, and so the disinflation had implicit stamps of approval from majorities in both parties. It is often the job of Congress to complain, but there were no serious moves made against the independence of the Fed, even if Elizabeth Warren and a few others squawked.

As for the commentariat, a diverse array of economists ranging from the Keynesian Paul Krugman to many conservative economists recognized that rate increases and disinflation were necessary and had to be done with promptness and fortitude. And so credibility reigned.

Granted, the rational expectations view is not always correct — and a recession somewhere down the road isn’t out of the question — but at least in this instance America pulled together and did the job. This sequence of events, which is continuing, should serve as a lesson to those predicting either the decline of America or the creeping polarization and paralysis of our politics. The disinflation can serve as Exhibit A for American optimism and a demonstration that we are still capable of making our own future.

Can the UK and EU pull off the same?

Austin Vernon on electric vehicles > hybrids

by  Tyler Cowen in

From my email, I will not indent but please note this is all from Austin:

“I don’t agree with electric vehicle mandates or subsidies, but the recent push against pure battery electric vehicles from free market commentators is bizarre. The arguments against them because of mineral shortages, battery shortages, or manufacturing emissions completely abandon free market principles. These arguments will lead to failure because they are obviously wrong after minimal investigation.A more effective argument would be that electric cars are so popular and production is growing so fast that there is no need for mandates. The market will provide the goods through better technology, increased output, and substitution. A company like GM will have no chance of paying its debt if it doesn’t make compelling electric cars. Then hammer home use cases that make no sense for batteries, like a farmer that needs a semi-truck for harvest. It will run nearly 24/7 for a week or two and then sit idle for the rest of the year. An electric truck would impose a significant economic penalty while barely saving emissions.Some of the errors:1. The majority of electric vehicles in the world use lead-acid batteries, not lithium-ion batteries. Low-speed electric vehicles are popular in China even though the government does not love them. They start at $1000 and might have 100 km of range. They are the Model T of electric cars, except with much better performance at a fraction of the cost of the Model T. They are modern marvels of economic growth. We don’t have these vehicles in rich countries because they would be illegal, and we can afford higher-performance vehicles. There are some exceptions, like golf carts in Peachtree City, GA.2. Electric cars are a great value. Low-speed electric vehicles obviously provide value to have so many sales. Something like a Tesla Model 3 has the performance of a BMW 3 series with a total cost of ownership more like a Camry. The next generation of electric cars that Chinese automakers and Tesla are designing will have highway-capable performance with an ownership cost below any gasoline car available and entry level purchase prices.3. The market is screaming for batteries that don’t use nickel or cobalt, and companies are delivering. Even Tesla thinks 2/3 to 3/4 of their cars will use lithium iron phosphate batteries. Only luxury vehicles and some semi trucks will use nickel batteries (and cheaper manganese might substitute for some of the nickel). The performance of lithium iron phosphate battery vehicles has improved because companies are figuring out how to make their cars more efficient and remove unnecessary packaging and structure from the packs to reduce weight. Sodium-ion batteries lack the performance of lithium batteries but are much better than lead-acid batteries that power most electric cars. Consumers will happily trade up as they get richer.4. We can build more factories and mines. Look at all the factory announcements! There is lots of lithium in the Earth’s crust! Let the market cook!5. The leading companies are now profitable without subsidies. Protectionists, unions, and car makers that still aren’t good at making battery cars drive lobbying for subsidies.6. The price of an item signals information about its availability! The need for scale is driving new manufacturing technology. Tesla hopes to produce 20 million cars yearly (car sales are ~80 million globally). They recently highlighted improvements like motors that use iron magnets instead of rare earth ones, higher voltage systems to reduce copper wiring, and a novel assembly technique to reach this scale. These are in addition to previously announced simplifications in battery manufacturing and a focus on lithium iron phosphate batteries. Electric cars need to be inexpensive to sell in the tens of millions. And that means using cheap, available materials that use less energy and labor to produce.7. Hybrid cars are an engineering travesty. They are more expensive and complex than either an internal combustion car or a pure electric car. There will be adequate fast chargers with a seamless experience now that almost every major North American carmaker is adopting Tesla’s chargers. A hybrid owner pays thousands of dollars more for a car, has to go to gas stations, needs oil changes, etc. A battery car owner might fast charge a few times a year while they eat lunch or shop when their vehicle range isn’t enough for the day’s driving. The battery car is way more convenient. Even many cases like semi trucks can get by with pure batteries because there is plenty of time to charge during government-mandated breaks. Someone with work or leisure that requires frequent highway driving for hours straight but doesn’t have mandated breaks should buy a regular gasoline car.8. Two-wheel and three-wheel vehicles are popular globally. But they are not big enough to support complicated hybrid powertrains. Highway-speed motorcycles are challenging to electrify. Mopeds, rickshaws, and e-bikes are easy.9. A new battery cathode technology might increase energy density and dramatically reduce battery costs. But this technology isn’t necessary to electrify ground vehicles on economics and consumer preference alone.10. Few people care about emissions in their revealed preferences. It’s all about selling stuff people want to buy. Governments will remove mandates if electric cars aren’t ready for the median voter. The worst case for freedom is that electric cars are incredibly successful, and we hurt the outliers that still need gasoline or diesel vehicles. Broadly attacking electric cars doesn’t help!”

Mental health and European economics departments

by  Tyler Cowen in

We study the mental health of graduate students and faculty at 14 Economics departments in Europe. Using clinically validated surveys sent out in the fall of 2021, we find that 34.7% of graduate students experience moderate to severe symptoms of depression or anxiety and 17.3% report suicidal or self-harm ideation in a two-week period. Only 19.2% of students with significant symptoms are in treatment. 15.8% of faculty members experience moderate to severe depression or anxiety symptoms, with prevalence higher among nontenure track (42.9%) and tenure track (31.4%) faculty than tenured (9.6%) faculty. We estimate that the COVID-19 pandemic accounts for about 74% of the higher prevalence of depression symptoms and 30% of the higher prevalence of anxiety symptoms in our European sample relative to a 2017 U.S. sample of economics graduate students. We also document issues in the work environment, including a high incidence of sexual harassment, and make recommendations for improvement.

That is from a new paper by Elisa Macchi, Clara Sievert, Valentin Bolotnyy, and Paul Barreira.

How the NSF Moved Faster than the NIH During COVID-19

by  Alex Tabarrok in

The NSF is a much smaller organization than the NIH but during the pandemic it moved more quickly. Why? Maxwell Tabarrok explains:

The NSF relied on its special congressional authority to skip peer review to bootstrap its pandemic-related granting. Two pre-existing programs which use this authority enabled the NSF’s speedy response. The RAPID (Rapid Response Research) and EAGER (EArly-concept Grants for Exploratory Research) programs focus on “proposals having a severe urgency,” and “exploratory work in its early stages on untested, but potentially transformative, research ideas,” respectively. Both turn applications around quickly: while typical federal science grants take 9-12 months of review, RAPID and EAGER grants usually provide funding to researchers in less than a month.

…The NSF funded valuable research through its RAPID grants program, including the development of the first COVID-19 test to get FDA approval, the Johns Hopkins COVID-19 data dashboard, and both inhaled and micro-needle patch vaccines, the latter of which is currently being scaled up for use in HPV vaccines. These examples don’t conclusively show that the NSF avoided sacrificing quality control for speed, but they suggest that the NSF’s internal team of reviewers funded multiple effective projects that benefited from faster turnarounds. The benefits of speeding up these big successes when they were urgently needed outweighed the hypothetical costs of approving some below-average projects.

In crises generally, the success of a science funder is determined by its biggest wins, not by the average quality of the projects it approves. Science’s impact on the pandemic was dominated by a single technology: the mRNA vaccine. The next most important contributions, likely testing or pharmaceutical treatments, were less important than the vaccine, and the average COVID-19 research project may have had minimal impact. External peer review slows down the funding of all projects to make sure that low-quality research is not funded. This kind of bottom-end quality control is less important in a crisis environment. At crisis-response margins, it’s probably better for science funding agencies to anchor less on quality control and instead take more shots on goal.

The NIH, to be fair, also responded more rapidly than usual and it used some special “shark-tank” like programs to do so which also worked well.

Read the whole thing for more recommendations.

Art market fractionalization

by  Tyler Cowen in

From an email sent to me by The Art Newspaper:

Fractionalisation and tokenisation of art are all the rage. While the notion of unlocking the value in an artwork by selling shares in it has been around for over a decade, a slew of new initiatives is taking it to an explosive new level.

Among the splashiest new launches is the Artex Stock exchange out of Liechtenstein, co-founded by financiers Prince Wenceslas von Liechtenstein and Yassir Benjelloun-Touimi, the latter seemingly the driving force. The project buys art (its first acquisition is Bacon’s Three Studies for a Portrait of George Dyer, 1963) bought for $52m in 2017 at Christie’s and now valued at $55m. Investors can buy shares for as little as $100 in the Bacon, which can be traded (or technically, the company that owns it) on the Liechtenstein MTF (an alternative trading platform). Other paintings will follow; trading starts on 21 July.

These ideas seem weird to me.  The more wonderful it is to own art, the lower should be its pecuniary rate of return, as recompense.  So why buy into fractional shares of an art work?  You don’t get to hang it on your work, and at the same time you get the subpar rate of return resulting from the fact that some people do get to hang it on their walls.

Bottlenecks and the productivity slowdown

by  Tyler Cowen in
Despite the rapid pace of innovation in information and communications technologies (ICT) and electronics, aggregate US productivity growth has been disappointing since the 1970s. We propose and empirically explore the hypothesis that slow growth stems in part from an unbalanced sectoral distribution of innovation over the last several decades. Because an industry’s success in innovation depends on complementary innovations among its input suppliers, rapid productivity growth that is concentrated in a subset of sectors may create bottlenecks and consequently fail to translate into commensurate aggregate productivity gains. Using data on input-output linkages, citation linkages, industry productivity growth and patenting, we find evidence consistent with this hypothesis: the variance of suppliers’ Total Factor Productivity growth or innovation adversely affects an industry’s own TFP growth and innovation. Our estimates suggest that a substantial share of the productivity slowdown in the United States (and several other industrialized economies) can be accounted for by a sizable increase in cross-industry variance of TFP growth and innovation. For example, if TFP growth variance had remained at the 1977-1987 level, US manufacturing productivity would have grown twice as rapidly in 1997-2007 as it did—yielding a counterfactual growth rate that would have been close to that of 1977-1987 and 1987-1997.

Here is the new NBER working paper by Daron Acemoglu, David Autor, and Christina Patterson.

Markets in everything those new service sector jobs body doubling edition

by  Tyler Cowen in

Consultant Micha Goebig scrolled through her phone to find receipts and bill clients while on her home computer on Friday afternoon. Nine strangers quietly watched her on a video link while also doing their own solo work.

The small group was gathered online by Flow Club, a subscription service that says it can help home-based workers stay on task and be productive by quietly working in tandem. The online session was built around body doubling, a productivity strategy gaining traction among remote and hybrid employees who say they get more done if others are looking on.

Body doubling, initially adopted by and coined by ADHD therapists, is one of several ways that workers are trying to regain focus and accountability when they aren’t working under the watchful eyes of bosses and colleagues in the office. A number of companies have sprung up to offer what they say is positive peer pressure that can boost productivity.

Here is the full WSJ piece, interesting throughout.  Via the excellent Samir Varma.

Shopify is a Great Company!

by  Alex Tabarrok in

Bloomberg: Time is money, and Shopify Inc. wants its workers to understand that maxim applies to pointless meetings, too.

The Canadian e-commerce company has rolled out a calculator embedded in employees’ calendar app that estimates the cost of any meeting with three or more people. The tool uses average compensation data across roles and disciplines, along with meeting length and attendee count, to put a price tag on the event. A typical 30 minute endeavor with three employees can run from $700 up to $1,600. Adding an executive — like Chief Operating Officer Kaz Nejatian, who built the program during a company-wide hack day — can shoot the cost above $2,000.

….The company is on pace to cut out 322,000 hours and 474,000 discrete events in 2023, according to Nejatian.

This point is especially important:

“No one at Shopify would expense a $500 dinner,” Nejatian said in an interview. “But lots and lots of people spend way more than that in meetings without ever making a decision.

Making good decisions requires taking into account all costs, including opportunity costs, and not just focusing on costs that are visibly priced. Without visible prices, however, it can be difficult to fully appreciate costs. Thus, making hidden opportunity costs visible is an excellent strategy for better decision making.

Hat tip: Joshua Gans.

The Brazil Tax

by  Alex Tabarrok in

The thread with many Brazilians sharing similar stories is worth perusing.

Peter Isztin on the incidence of AI

by  Tyler Cowen in

This short paper considers the effects of artificial intelligence (AI) tools on the division of labor across tasks. Following Becker and Murphy (1992) I posit a “team” with each team member being assigned to a task. The division of labor (that is, the number of specialized tasks) is here limited not only by the extent of the market, but by coordination costs. Coordination costs stem from the need for knowledge in multiple tasks, as well as from monitoring and punishing shirking and other malfeasance. The introduction of AI in this model helps the coordination of the team and fully or partially substitute for human “generalist” knowledge. This in turn can make specialization wider, resulting in a greater number of specialized fields. The introduction of AI technologies also increases the return to fully general knowledge (i.e.education).

Not a certainty, but definitely worth a ponder.  Here is the draft. 

Can the School Choice Movement Liberate Childhood?

by  Alex Tabarrok in

Richard Hanania has a very good post on the rapidly expanding school choice movement and his hopes for a radical rethinking of education.

The first thing to point out about public education is that it involves an extreme restriction of liberty beyond anything we usually accept. How common is it for government to force you to be in a certain place at a certain time? What I call “time-place” mandates are rare. Sometimes you have to go to the DMV, but even then you spend a short amount of time there, and can generally choose when to go. Sometimes people have to respond to subpoenas or jury duty, but those are uncommon events in most people’s lives. Government says to do your taxes, though you only have a deadline and can fill out the paperwork whenever and under whatever conditions you want.

The only substantial populations of individuals who have their lives structured according to time-place mandates in a free society like ours are prisoners, members of the military, and children. The mandates for children have gotten less strict over the years now that all states allow homeschooling, but opponents of school choice for all practical purposes want to do what they can to shape the incentive structures of parents so that they all use public schools (liberal reformers tend to like vouchers that can be used at charter schools, but not ESAs, which give parents complete control). Of course, children don’t have the freedom of adults, and so others are by default in control of how they spend most of their time. But it’s usually parents, not the government, that we trust in this role. Given the unusual degree to which public education infringes on individual liberty and family autonomy, the burden of proof has to be on those in favor of maintaining such an extreme institution.

…To me, the true promise of the school choice movement isn’t that it might simply save a bit of money or avoid the worst excesses of public education. Rather, it presents an opportunity to rethink childhood…On what basis did we as a society decide that the ideal way to spend a childhood was to attend government institutions 5 days a week, 7 hours a day, 9 months a year, for 12 years? That most of that time should be spent sitting at a desk, with say one hour for lunch and one for recess?

My hope is that states with universal ESAs will see radical experimentation. Maybe some parents would send their kids to a traditional school for six months of the year, and then have them apprenticing or interning in the workforce the rest of the time. Imagine having a few months experience working at a law firm during eighth grade, grabbing coffee for corporate executives in ninth grade, following around a pipe fitter in tenth grade, and helping around a gym in eleventh grade.

I too would like to see radical experimentation in education but I’m struck by how conservative and homogeneous schools are, regardless of their public or private status. Private schools, despite having the autonomy, have not pioneered novel teaching methods. Montessori was innovative but that was a hundred years ago. A few private schools have adopted Direct Instruction, but how many offer lessons in memory palaces, mental arithmetic or increasing creativity?

I am enthusiastic about developments coming out of Elon Musk’s school and Minerva but it’s still remarkable how similar almost all private schools are to almost all public schools. The global adoption of a nearly identical education model is also disturbing, as I harbor significant skepticism that we’ve reached an optimum. I see this as more of an outcome of world-elite consensus, similar to what we saw with COVID policy, with basically only Sweden bucking the trend and coming under intense pressure for doing so.

Online education and AI ought to greatly expand the potential range of experimentation but the demand for experimentation appears to be low.

Hanania has more of interest to say. Read the whole thing.

Thinking about congestion pricing in terms of the quantity dual

by  Tyler Cowen in

Ask a YIMBY person: “What about the extra traffic from all those new people moving in?  Won’t the ambulance arrival times be slower?  Won’t the air pollution be worse?  Won’t….?” and you will get a reassuring answer that a) yes there will be some problems but they can be managed by other means, and b) the external benefits of new arrivals will outweigh those problems.

Fair enough.

But then ask that same YIMBY person: “What about the extra traffic coming from all these out-of-NYC visitors?” …and you will get a very different answer.  “Tax them!”

So the basic view, at current margins, is “residents good, visitors bad.”

Maybe!  But, to follow up on the recent debate, that differential treatment is never justified.  What if a guy starts visiting a girlfriend in the East Village — by car — for one night every two weeks?  Then he is a visitor to be taxed.  Say the relationship goes well, he is there 2/3 of the time, and he rents a space for his car in her apartment building garage and uses it periodically.  Is he then “a resident”?  Are his per hour externalities for the world then suddenly so much more positive?  (Does he stop spitting on the sidewalk?)

Again, maybe, but you can see the a priorism embedded in the standard “YIMBY plus congestion tax” mix of proposals.  Somehow the differential views on residents and visitors do not need to be justified.

If you wish, think of the cars issue in terms of quantity allocation.  There is only so much space for cars in lower Manhattan.  How much of that space do you wish to allocate to residents with cars or to visitors with cars?  (This question can hold whether you are doing the allocating with prices, with planning, or by some other method.)

If you favor YIMBY plus a congestion tax, in essence you think resident car use is better than visitor car use.

But how do you know that?  Repeating to me on Twitter that pollution is bad, traffic in NYC is too slow, externalities are present, and so on is a non sequitur that does not address the question.

Alternatively, you might think visitor car use is better at the margin.  Then you might place bigger taxes on cars garaged in lower Manhattan, and lower the tolls on the George Washington Bridge.

I don’t see a good a priori case against the visitors.  Maybe there are diminishing returns to being exposed to the genius of NYC, and at the margin we want to encourage the dad who drives from Westchester County with his 15 year old son to see a concert at the Village Vanguard, to get the kid excited about the saxophone.  Or maybe there are increasing returns to being exposed to the genius of NYC (you have to soak up book wisdom at the Strand for twenty years running), which would then cut the other way.

We do observe a lot of people living in NYC for a few years when they are younger, and then leaving for saner pastures.  But they move there to be moved and inspired for a while.  That suggests there is some temporary nature to the net benefits from the exposure to NYC.  We also see more generally, for political economy reasons, that status quo urban policies tend to favor residents and punish visitors to an undue degree.  And, if we stick with the pro-YIMBY intuitions and reallocate more road resources toward residents, do we not have to worry about the traffic, noise, and congestion from the required extra construction?  These arguments don’t prove any conclusion, but they do suggest there should not be an a priori bias against reallocating some traffic space away from residents and toward visitors.

The point here is to have consistent views across YIMBY and a congestion tax.  And if you think we should reallocate vehicle space more toward residents and away from visitors, please make a comparative argument to that effect.  Repeating observations about crowding and externalities is not an argument on either of these questions.

Addendum: For an extra point, “throughput” and “demand” are not the same.

I’ve been seeing this error frequently.  Congestion pricing may well increase throughput, which is how many users get through a road or some other chokepoint in a discrete period of time, say an hour.

It is much harder for congestion pricing to increase overall demand.  For instance, at a zero explicit price the ride takes much longer but overall more people will travel through than if you charge them $20 to do the trip.  That said, the $20 price may well increase throughput, but if it decreases demand there is still an opportunity cost from the policy.  Don’t use the possibility of higher throughput to argue the congestion toll does not have costs for many of the visitors (of course some visitors will gain due to heterogeneity effects).